Although proponents of the technique expect to be chosen as the preferred manager, they readily accept that this is not always possible. Managers will often rationalise the decision to outsource with client demand – if clients want a solution which is non-core to the business, then outsourcing is the answer. This inevitably leads to diversification of the product range, which asset managers are pursuing globally.
There is another view – one which is becoming the voice of a growing minority as sub-advisory continues to sweep through Europe. This view states that outsourcing is a weakness and is only used by organisations which are on their way down. Instead of re-investing and building up internal capacity, such companies choose “the path of least resistance” and hand out mandates to external groups.
When comparing France to other European countries, sub-advisory can still be seen as rather limited. Centred mainly around funds of funds, large multi-manager deals and strategic relationships, the strategy is indeed being practised – albeit on a more limited scale than in other more ‘mature’ countries (ie UK and Switzerland).
French organisations are rapidly coming to the realisation that superior performance cannot always be obtained in-house and across all asset classes. In this challenging market environment, investors have had to search for alternative sources of return in niche asset classes which had long been overlooked, for example, high yield, emerging market debt, currency and commodities. Managing these complex asset classes requires a depth of expertise and a high level of skill, which in turn costs money. Evidence shows that in France, almost all decisions to sub-advise have been taken as a cheaper means to accessing this costly investment expertise.
Indeed, according to a recent survey conducted by PWM magazine2, sub-advisory in France is expected to peak in the near future. The survey states that the French sub-advisory market is estimated to be worth up to €75bn, with typically outsourced equities, followed by fixed income. Balanced products, liquidity and alternatives form the next most popular segment, while structured products are rarely included in the mix. Of the six prominent institutions surveyed by PWM – with a total of over €226bn – all admitted to implementing an active outsourcing strategy. Dominant demand and growth were seen in equity products, along with some balanced and alternatives. Fifty percent of the respondents admitted that they are and will be outsourcing more, while the other half assumed they would remain stable.
These results alone seem to suggest that French institutions are well on their way to joining the leaders of the sub-advisory trend.
An important driver of the current sub-advisory boom is, quite simply, the consumer. Spoilt for choice, investors are becoming more demanding - with high expectations of what financial institutions can offer them. At the same time, investors are becoming smarter. No longer necessarily content with the usual product offering, they are now looking for the widest selection of competitively priced and performing investments.
Faced with this scenario, French institutions are meeting the challenge through sub-advisory. Of those surveyed, the majority identified the “necessity of offering an enhanced product range” as the main driver behind their decision to outsource. Additional factors included improved investment performance, and the ability for businesses to concentrate on core competencies. One further element which seems to be gaining a foothold in the decision making process is control. Once a company has decided to embrace sub-advisory for the above reasons, it employs a strict, disciplined and qualitative selection process. Only those providers which meet the criteria are selected - and continually monitored to ensure that client demands are being met.
Compared to other Continental European countries, France is dominated by a small number of very sizeable banks and insurance distributors – seven banks and four insurers - whose in-house asset management subsidiaries have historically been well equipped to answer their captive clients needs.
In the last five years, asset management subsidiaries of large groups have been faced with pressure from both shareholders and clients to find solutions on how to manage successfully under-researched and increasingly complex asset classes. Multi-manager programmes in the long-only and alternative spaces have typically been their response to this demand.
Today, we are currently experiencing a shift from an open architecture market, dominated by multi-management via open-ended funds, to a sub-advisory mandate-dominated market. This trend will typically benefit asset managers who are able to deliver on their promise of partnership, investment expertise, performance and above all risk awareness will be the keys to winning the mandates.
1Agefi supplement, in association with Goldman Sachs Asset Management, June 2005.
2Guide to Europe’s Sub-Advisers. PWM supplement. June 2005.
Geraud Dambrine is executive director of Goldman Sachs Asset Management
Researched and published in association with Goldman Sachs Asset Management
